His late father was the chairman of the biochemistry department at Columbia University, and created a biotech company that was sold to Celltech Group, a British drug outfit. At the age of 13, Edelman started working in his father's lab, but then veered from the biotech path to major in psychology at the University of California at San Diego and get an M.B.A. from New York University. He then spent 11 years as a biotech analyst at a brokerage and two asset-management firms, prior to launching his hedge fund, Perceptive Life Sciences, in July 1999 with just $6 million in assets.

New York-based Perceptive has thrived. Today, it runs $955 million and has posted excellent results by investing in a notoriously volatile and risky business, in which most new drugs fail, whether in the lab, the regulatory maze, or the marketplace.

BACKED BY SIX pharmaceutical-industry analysts, the 58-year-old Edelman is known for selecting the right products. "The critical thing we are doing is evaluating the science and the data to decide whether a drug will work and whether it will be approved," says Edelman, adding that he focuses mostly on early clinical information. "If we think there is a higher probability that a drug will work than the Street does, we may have a long on that position."

Or, as in the case of Canada's
Oncolytics BiotechONCY -2.5714285714285716%Oncolytics Biotech Inc.U.S.: NasdaqUSD0.7502
-0.0198-2.5714285714285716%
/Date(1427830259197-0500)/
Volume (Delayed 15m)
:
523032
P/E Ratio
N/AMarket Cap
81429658.8640855
Dividend Yield
N/ARev. per Employee
N/AMore quote details and news »ONCYinYour ValueYour ChangeShort position
(ticker: ONCY), he may be skeptical and have a short position. Edelman didn't believe in the firm's Reolysin, a product for the treatment of head and neck cancer, because it didn't work without administering other drugs at the same time. He also thought the clinical trials fell short of Oncolytics' initial promises. He shorted Oncolytics in January 2011, when it was trading at about $6 a share. It's now around $1.50, and he still hasn't covered his position.

"If we think there is a higher probability that a drug will work than the Street does," Edelman is inclined to buy.
Jordan Hollender for Barron's

Edelman claims his scientific analysis of every step in the development of a new pharmaceutical gives him an advantage over sell-side analysts, whom he says often are reluctant to admit mistakes and don't react fast enough to new information. Perceptive derives most of its returns by buying and selling stocks that stay in the portfolio for years. The size of the positions changes with new information. And after selling a stock, he will buy it back at a higher price if "I learn something new."

THIS ACTIVE, DISPASSIONATE APPROACH has benefited both the firm and its investors. Net of its 2% management fee and a hefty 25% performance fee, Perceptive has delivered an estimated annualized return of 30.2% from its 1999 inception through Dec 20. Few equity funds of any sort have done that well over such a long span. In a red-hot biotech market this year, Perceptive posted a net return of 47.1% through Dec. 20 (the firm's most recent estimate), easily topping the S&P 500's stellar 30.2% for that period.

Most of Perceptive's growth stems from long positions in companies whose products have overcome investor worries about their effectiveness. One example is
MorphoSys
(MOR.Germany), the fund's biggest position. MorphoSys is "unique among biotech companies" because it has more cash flowing in than out, thanks mainly to its R&D expertise, Edelman observes. The company had 401.9 million euros ($550 million) in cash as of Sept. 30, mostly from conducting research for other pharma makers.

Edelman is particularly enthused about MorphoSys' work on an antibody for multiple myeloma, a cancer that attacks blood-plasma cells. Although a lack of reported data on clinical trials gives pause to some investors, Edelman "took a little leap of faith" because
CelgeneCELG -3.3369438426928846%Celgene Corp.U.S.: NasdaqUSD116.015
-4.005-3.3369438426928846%
/Date(1427830380061-0500)/
Volume (Delayed 15m)
:
7284472
P/E Ratio
46.327345309381236Market Cap
96086929542.6938
Dividend Yield
N/ARev. per Employee
1271270More quote details and news »CELGinYour ValueYour ChangeShort position
(CELG), a leader in this field, agreed to pay MorphoSys a larger royalty than usual to develop the antibody. "That was a vote of confidence," says Edelman. The stock's up 400% since he started buying it in July 2008. He's also bought Celgene since then.

The most volatile stock in Edelman's portfolio is one that Barron's has written favorably about several times:
Sarepta TherapeuticsSRPT -4.470079307858688%Sarepta Therapeutics Inc.U.S.: NasdaqUSD13.25
-0.62-4.470079307858688%
/Date(1427830370594-0500)/
Volume (Delayed 15m)
:
361319
P/E Ratio
N/AMarket Cap
572997439.081726
Dividend Yield
N/ARev. per Employee
47828.4More quote details and news »SRPTinYour ValueYour ChangeShort position
(SRPT). The shares plummeted more than 75% in early November after the Food and Drug Administration announced that it wouldn't consider accelerated approval for Eteplirsen, a drug that Sarepta is developing to treat Duchenne muscular dystrophy, a crippling disease mainly hitting young boys. Edelman, however, maintains that Sarepta's clinical findings are sound, and that the drug eventually will win approval. The FDA's refusal was based on the recent failure of a competing product, but Edelman argues that the two shouldn't be lumped together. He estimates Eteplirsen's potential market at about $4 billion annually in the U.S. alone. "If the drug works and gets approved, Sarepta has more upside than any other mid-cap stock," he adds.

Edelman spreads his risk by owning 125 to 150 stocks at any one time, each at a different weight. "I view portfolio analysis a little like a poker game," he says. "You have to press the bet if you have a good hand."

One of his shorts is
ThromboGenicsthr.BT -3.7540086776079984%Thrombogenics N.V.Belgium: BrusselsEUR5.102
-0.199-3.7540086776079984%
/Date(1427841300000-0500)/
Volume (Delayed 15m)
:
170165
P/E Ratio
N/AMarket Cap
191336141.194141
Dividend Yield
N/ARev. per Employee
94356.2More quote details and news »thr.BTinYour ValueYour ChangeShort position
(THR.Belgium), which has a new drug called Jetrea, for vitreomacular adhesion, a rare form of blindness. Based on the small number of patients that physicians have reported treating, Edelman believes Jetrea's market is worth less than a quarter of the $400 million to $500 million Wall Street estimates it is. Jetrea could also be a victim of its own success: It works with just one injection. "So the patients out there will all be gone," Edelman says. He shorted the stock in March 2012, when it was trading at about €25 a share. Last week, it was quoted at €17.

ADVANCED AS IT IS, biotechnology hasn't been able to cure its shares' volatility. So it's unlikely the group can repeat 2013's huge gains in 2014. "While it sounds cliched, I believe it'll be a stockpicker's market' in biotech stocks next year," Edelman says. He expects larger-cap, better-known stocks, such as Celgene and HIV drug-licensing specialist
Gilead Sciences gild -1.6824908133876253%Gilead Sciences Inc.U.S.: NasdaqUSD98.9959
-1.6941-1.6824908133876253%
/Date(1427830378919-0500)/
Volume (Delayed 15m)
:
8445928
P/E Ratio
16.04383116883117Market Cap
149967888754.643
Dividend Yield
N/ARev. per Employee
3555710More quote details and news »gildinYour ValueYour ChangeShort position
(GILD), to be better bets than smaller, riskier shares. These bigger companies work in partnerships with pharmaceutical developers, rather than risking everything on a Phase 1 clinical trial. Their shares are also much cheaper than their riskier counterparts'. That's where Edelman would place his wagers right now.